Chapter 10

Flexible Budgets and Performance

Analysis
Solutions to Questions
10-1 The planning budget is prepared
for the planned level of activity. It is static
because it is not adjusted even if the level
of activity subsequently changes.
10-2 A flexible budget can be adjusted
to reflect any level of activityincluding
the actual level of activity. By contrast, a
static planning budget is prepared for a
single level of activity and is not
subsequently adjusted.
10-3 Actual results can differ from the
budget for many reasons. Very broadly
speaking, the differences are usually due
to a change in the level of activity,
changes in prices, and changes in how
effectively resources are managed.
10-4 As noted above, a difference
between the budget and actual results can
be due to many factors. Most importantly,
the level of activity can have a very big
impact on costs. From a managers
perspective, a variance that is due to a
change in activity is very different from a
variance that is due to changes in prices
and changes in how effectively resources
are managed. A variance of the first kind
requires very different actions from a
variance of the second kind.
Consequently, these two kinds of
variances should be clearly separated
from each other. When the budget is
directly compared to the actual results,
these two kinds of variances are lumped
together.
10-5 An activity variance is the
difference between a revenue or cost item

in the static planning budget and the

same item in the flexible budget. An
activity variance is due solely to the
difference in the level of activity assumed
in the planning budget and the actual
level of activity used in the flexible
budget. Caution should be exercised in
interpreting an activity variance. The
favorable and unfavorable labels are
perhaps misleading for activity variances
that involve costs. A favorable activity
variance for a cost occurs because the
cost has some variable component and
the actual level of activity is less than the
planned level of activity. An unfavorable
activity variance for a cost occurs because
the cost has some variable component
and the actual level of activity is greater
than the planned level of activity.
10-6 A revenue variance is the
difference between how much the revenue
should have been, given the actual level
of activity, and the actual revenue for the
period. A revenue variance is easy to
interpret. A favorable revenue variance
occurs because the revenue is greater
than expected for the actual level of
activity. An unfavorable revenue variance
occurs because the revenue is less than
expected for the actual level of activity.
10-7 A spending variance is the
difference between how much a cost
should have been, given the actual level
of activity, and the actual amount of the
cost. Like the revenue variance, the
interpretation of a spending variance is
straight-forward. A favorable spending
variance occurs because the cost is lower

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Solutions Manual, Chapter 10

245

than expected for the actual level of

activity. An unfavorable spending variance
occurs because the cost is higher than
expected for the actual level of activity.
10-8 In a flexible budget performance
report, the static planning budget is not
directly compared to actual results. The
flexible budget is interposed between the
static planning budget and actual results.
The differences between the static
planning budget and the flexible budget
are activity variances. The differences
between the flexible budget and the
actual results are the revenue and
spending variances. The flexible budget
performance report cleanly separates the
differences between the static planning
budget and the actual results that are due
to changes in activity (the activity
variances) from the differences that are
due to changes in prices and the
effectiveness with which resources are
managed (the revenue and spending
variances).
10-9 The only difference between a
flexible budget based on a single cost

driver and one based on two cost drivers

is the cost formulas. When there are two
cost drivers, some costs may be a function
of the first cost driver, some costs may be
a function of the second cost driver, and
some costs may be a function of both cost
drivers.
10-10 When the static planning budget is
directly compared to actual results, it is
implicitly assumed that costs (and
revenues) should not change with a
change in the level of activity. This
assumption is valid only for fixed costs.
However, it is unlikely that all costs are
fixed. Some are likely to be variable or
mixed.
10-11 When the static planning budget is
adjusted proportionately for a change in
activity and then directly compared to
actual results, it is implicitly assumed that
costs should change in proportion to a
change in the level of activity. This
assumption is valid only for strictly
variable costs. However, it is unlikely that
all costs are strictly variable. Some are
likely to be fixed or mixed.

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246

Exercise 10-5 (15 minutes)

Alyeski Tours
Planning Budget
For the Month Ended July 31
Budgeted cruises (q1)..................................................
Budgeted passengers (q2)...........................................

24
1,400

Revenue ($25.00q2).....................................................

$35,00
0

Expenses:
Vessel operating costs ($5,200 + $480.00q1 +
$2.00q2).................................................................
Advertising ($1,700).................................................
Administrative costs ($4,300 + $24.00q1 +$1.00q2).
Insurance ($2,900)....................................................
Total expense..............................................................
Net operating income..................................................

19,520
1,700
6,276
2,900
30,396
$ 4,604

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247

Exercise 10-6 (10 minutes)

The variance report compares the planning budget to actual
results and should not be used to evaluate how well costs were
controlled during April. The planning budget is based on 100 jobs,
but the actual results are for 105 jobs. Consequently, the actual
revenues and many of the actual costs should have been different
from what was budgeted at the beginning of the period. Direct
comparisons of budgeted to actual costs are valid only if the costs
are fixed.
To evaluate how well revenues and costs were controlled, it is
necessary to estimate what the revenues and costs should have
been for the actual level of activity using a flexible budget. The
flexible budget amounts can then be compared to the actual
results to evaluate how well revenues and costs were controlled.

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248

Exercise 10-7 (15 minutes)

The adjusted budget was created by multiplying each item in the
budget by the ratio 105/100; in other words, each item was
adjusted upward by 5%. This procedure provides valid
benchmarks for revenues and for costs that are strictly variable,
but overstates what fixed and mixed costs should be. Fixed costs,
for example, should not increase at all if the activity level
increases by 5%providing, of course, that this level of activity is
within the relevant range. Mixed costs should increase less than
5%.
To evaluate how well revenues and costs were controlled, it is
necessary to estimate what the revenues and costs should have
been for the actual level of activity using a flexible budget that
explicitly recognizes fixed and mixed costs. The flexible budget
amounts can then be compared to the actual results to evaluate
how well revenues and costs were controlled.

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249

Exercise 10-9 (15 minutes)

Lavage Rapide
Flexible Budget
For the Month Ended August 31
Actual cars washed (q)............................

8,800

Revenue ($4.90q)....................................

$43,12
0

Expenses:
Cleaning supplies ($0.80q)...................
Electricity ($1,200 + $0.15q)................
Maintenance ($0.20q)...........................
Wages and salaries ($5,000 + $0.30q).
Depreciation ($6,000)...........................
Rent ($8,000)........................................
Administrative expenses ($4,000 +
$0.10q)...............................................
Total expense..........................................
Net operating income..............................

7,040
2,520
1,760
7,640
6,000
8,000
4,88
0
37,84
0
$ 5,28
0

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250

Exercise 10-13 (10 minutes)

Wyckam Manufacturing Inc.
Planning Budget for Manufacturing Costs
For the Month Ended June 30
Budgeted machine-hours (q)...

5,000

Direct materials ($4.25q)........

$21,25
0
36,800
1,500
1,650
16,700
12,700
$90,60
0

Direct labor ($36,800).............

Supplies ($0.30q)....................
Utilities ($1,400 + $0.05q)......
Depreciation ($16,700)...........
Insurance ($12,700)................
Total manufacturing cost.........

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251

Exercise 10-14 (20 minutes)

Jakes Roof Repair
Activity Variances
For the Month Ended May 31

Repair-hours (q)......................
Revenue ($44.50q)..................
Expenses:
Wages and salaries
($23,200 + $16.30q)..........
Parts and supplies ($8.60q). .
Equipment depreciation
($1,600 + $0.40q)..............
Truck operating expenses
($6,400 + $1.70q)..............
Rent ($3,480)........................
Administrative expenses
($4,500 + $0.80q)..............
Total expense..........................
Net operating income..............

Planning
Budget
2,800
$124,60
0

Flexible
Budget
2,900

Activity
Variances

$129,050

$4,45
0

68,840
24,080

70,470
24,940

1,630
860

U
U

2,720

2,760

40

11,160
3,480

11,330
3,480

170
0

6,740
117,020

6,820
119,800

U
U

$ 7,580

$ 9,250

80
2,780
$1,67
0

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Exercise 10-15 (20 minutes)

Via Gelato
Revenue and Spending Variances
For the Month Ended June 30
Revenue
and
Spending
Variances

Flexible
Budget
6,200

Actual
Results
6,200

Revenue ($12.00q)..................
Expenses:
Raw materials ($4.65q).........
Wages ($5,600 + $1.40q).....
Utilities ($1,630 + $0.20q)....
Rent ($2,600)........................
Insurance ($1,350)................
Miscellaneous ($650 +
$0.35q)...............................
Total expense..........................

$74,400

$71,54
0

$2,860

28,830
14,280
2,870
2,600
1,350

29,230
13,860
3,270
2,600
1,350

400
420
400
0
0

U
F
U

2,820
52,750

230
150

F
U

Net operating income..............

$21,650

2,590
52,900
$18,64
0

$3,010

Liters (q).................................

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Exercise 10-16 (30 minutes)

AirQual Test Corporation
Flexible Budget Performance Report
For the Month Ended February 28

Jobs (q)............................................
Revenue ($360.00q)........................
Expenses:
Technician wages ($6,400)............
Mobile lab operating expenses
($2,900 + $35.00q)....................
Office expenses ($2,600 +
$2.00q).......................................
Advertising expenses ($970)........
Insurance ($1,680)........................
Miscellaneous expenses
($500 + $3.00q).........................
Total expense..................................
Net operating income......................

Flexibl
e
Budget
52

Revenue
and
Spendin
g
Variance
s

Plannin
g
Budget
50

Activity
Varianc
es

$18,000

$720

F $18,720

$230

$18,950

6,400

6,400

50

6,450

4,650

70

4,720

190

4,530

2,700
970
1,680

4
0
0

2,704
970
1,680

346
25
0

U
U

3,050
995
1,680

650
17,050
$ 950

6
80
$640

U
656
U 17,130
F $ 1,590

191
40
$190

F
U
F

465
17,170
$ 1,780

Actual
Results
52

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Exercise 10-17 (45 minutes)

1. The planning budget based on 3 courses and 45 students
appears below:
Gourmand Cooking School
Planning Budget
For the Month Ended September 30
Budgeted courses (q1)........................................
Budgeted students (q2)......................................

3
45

Revenue ($800q2)..............................................

$36,00
0

Expenses:
Instructor wages ($3,080q1)............................
Classroom supplies ($260q2)...........................
Utilities ($870 + $130q1).................................
Campus rent ($4,200)......................................
Insurance ($1,890)..........................................
Administrative expenses ($3,270 + $15q1 +
$4q2).............................................................
Total expense.....................................................
Net operating income........................................

9,240
11,700
1,260
4,200
1,890
3,49
5
31,78
5
$ 4,21
5

2. The flexible budget based on 3 courses and 42 students

appears below:
Gourmand Cooking School
Flexible Budget
For the Month Ended September 30
Actual courses (q1).............................................
Actual students (q2)............................................

3
42

Revenue ($800q2)..............................................

$33,60
0

Expenses:
Instructor wages ($3,080q1)............................
Classroom supplies ($260q2)...........................
Utilities ($870 + $130q1).................................
Campus rent ($4,200)......................................

9,240
10,920
1,260
4,200

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Insurance ($1,890)..........................................
Administrative expenses ($3,270 + $15q1 +
$4q2).............................................................
Total expense.....................................................
Net operating income........................................

1,890
3,48
3
30,99
3
$ 2,60
7

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256

Exercise 10-17 (continued)

3. The flexible budget performance report for September appears below:
Gourmand Cooking School
Flexible Budget Performance Report
For the Month Ended September 30
Plannin
g
Budget
Courses (q1)..............................
Students (q2)............................

Activity
Variance
s

3
45

Revenue
and
Spending
Variances

3
42

$36,00
0

$2,40
0

9,240
11,700
1,260
4,200
1,890

0
780
0
0
0

3,495

12

Total expense............................

31,785

Net operating income................

$ 4,215

792
$1,60
8

Revenue ($800q2).....................
Expenses:
Instructor wages ($3,080q1)...
Classroom supplies ($260q2)..
Utilities ($870 + $130q1)........
Campus rent ($4,200).............
Insurance ($1,890)..................
Administrative expenses
($3,270 + $15q1 +$4q2).....

Flexibl
e
Budge
t

U
F

Actual
Results
3
42

$33,60
0

$1,20
0

9,240
10,920
1,260
4,200
1,890
3,48
3
30,99
3
$ 2,60
7

160
2,380
270
0
0

F
F
U

9,080
8,540
1,530
4,200
1,890

307

3,790

1,963

29,030

$ 763

$ 3,370

$32,40
0

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257

Exercise 10-18 (45 minutes)

1. The planning budget appears below. Note that the report does
not include revenue or net operating income because the
production department is a cost center that does not have any
revenue.
Packaging Solutions Corporation
Production Department Planning Budget
For the Month Ended March 31
Budgeted labor-hours (q).......................

8,000

Direct labor ($15.80q)............................

$126,40
0
21,000
12,800
4,300
52,600

Indirect labor ($8,200 + $1.60q)............

Utilities ($6,400 + $0.80q).....................
Supplies ($1,100 + $0.40q)...................
Equipment depreciation ($23,000 +
$3.70q)................................................
Factory rent ($8,400).............................
Property taxes ($2,100).........................
Factory administration ($11,700 +
$1.90q)................................................
Total expense.........................................

8,400
2,100
26,900
$254,50
0

2. The flexible budget appears below. Like the planning budget,

this report does not include revenue or net operating income
because the production department is a cost center that does
not have any revenue.
Packaging Solutions Corporation
Production Department Flexible Budget
For the Month Ended March 31
Actual labor-hours (q).............................

8,400

Direct labor ($15.80q)............................

$132,72
0
21,640
13,120
4,460

Indirect labor ($8,200 + $1.60q)............

Utilities ($6,400 + $0.80q).....................
Supplies ($1,100 + $0.40q)...................

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258

Equipment depreciation ($23,000 +

$3.70q)................................................
Factory rent ($8,400).............................
Property taxes ($2,100).........................
Factory administration ($11,700 +
$1.90q)................................................
Total expense.........................................

54,080
8,400
2,100
27,660
$264,18
0

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259

Exercise 10-18 (continued)

3. The flexible budget performance report appears below. This report does not include
revenue or net operating income because the production department is a cost center
that does not have any revenue.
Packaging Solutions Corporation
Production Department Flexible Budget Performance Report
For the Month Ended March 31

Labor-hours (q)...........................
Direct labor ($15.80q)................
Indirect labor ($8,200 +
$1.60q)....................................
Utilities ($6,400 + $0.80q).........
Supplies ($1,100 + $0.40q)........
Equipment depreciation
($23,000 + $3.70q)..................
Factory rent ($8,400)..................
Property taxes ($2,100)..............
Factory administration
($11,700 + $1.90q)..................
Total expense..............................

Plannin
g
Budget
8,000

Activity
Variance
s

$126,40
0

$6,32
0

21,000
12,800
4,300
52,600
8,400
2,100
26,90
0
$254,50
0

Flexible
Budget
8,400

Spendin
g
Variance
s

Actual
Results
8,400

$132,72
0

$2,01
0

$134,73
U
0

640
320
160

U
U
U

21,640
13,120
4,460

1,780
1,450
520

F
U
U

1,480
0
0

54,080
8,400
2,100

0
300
0

760
$9,68
0

27,660
$264,18
0

1,190
$1,31
0

19,860
14,570
4,980

54,080
U
8,700
2,100
26,47
F
0
$265,49
U
0

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260

Exercise 10-18 (continued)

4. The overall unfavorable activity variance of $9,680
occurred because the actual level of activity exceeded the
budgeted level of activity. The production manager
certainly should not be held responsible for this
unfavorable variance if this increased activity was due to
more orders or more sales. On the other hand, the overall
unfavorable spending variance of $1,310 may be of
concern to management. Why did the unfavorableand
favorablevariances occur? Even the relatively small
unfavorable spending variance for supplies of $520 should
probably be investigated because, as a percentage of
what the cost should have been ($520/$4,460 = 11.7%),
this variance is fairly large.

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Solutions Manual, Chapter 10